Standard & Poor’s GSCI Total Return Index, which tracks 24 raw materials, is hovering near a record low relative to the benchmark S&P 500. According to Shawn Hackett, the president of Hackett Financial Advisors in Boynton Beach, Florida, that suggests a major and extended 10-year bull market run starting in 2018.
“In 2008 stocks were screaming to be bought on this valuation metric, and that was proven correct,” Hackett wrote in a note to clients Monday evening. “We now have the exact opposite condition where commodities are screaming to be bought at the expense of stocks.”
Two managers of commodities funds, Leigh Goehring and Adam Rozencwajg, agree saying “Only in the depths of the Great Depression and at the end of the dying Bretton Woods Gold Exchange Standard did commodities reach this level of undervaluation relative to equities.”
While the S&P 500 has done incredibly well over the last 10 years, commodity prices have done the opposite. In fact, over the last decade, commodities have been in a deep bear market that has seen prices underperform considerably. Other instances when commodity prices have been this cheap were just prior to the massive bull markets of the 70s and 00s.
“When commodities are this cheap relative to stocks, the returns accruing to commodity investors have been spectacular,” Goehring and Rozencwajg wrote in a recent investor letter. “For example, had an investor bought the Goldman Sachs Commodity Index (or something equivalent) in 1970, by 1974 he would have compounded his money at 50% per year. From 1970 to 1980, commodities compounded annually in price by 20%. If the same investor had bought commodities in 2000, he would have also compounded his money at 20% for the next ten years—especially attractive considering the broad stock market indices returned nothing over the same period.”
There are additional factors that provide promising signs of a commodity bull market beginning soon. Among them are supply side factors where thin margins could create a “price floor” for commodities as costs have inflated alongside commodity prices continuing to fall.
In an effort to improve margins, companies have been aggressively slashing CAPEX. However, PwC found that of the $49 billion in CAPEX spent in 2016, just half was put toward growth projects, while the other half was spent on sustaining capital. This could have devastating consequences for supply as, in order to maintain production levels in the future, companies will have to compete with one another in bidding on exploration and potential production projects. Such a situation will likely take share prices higher for junior and mid-tier miners, giving momentum to the commodities equity markets.
Another sign? Copper.
Copper is often an early indicator of economic cycles, often topping early at economic peaks and bottoming early at economic troughs. It also tends to lead a bull market in broader commodities. Futures for the most important industrial metal in the world bottomed in May of this year, and have since risen nearly 34% signaling the beginning of a big run for commodities.
According to Sven Carlin, a hedge fund manager and Investiv Daily author, investors looking to get in on a new bull market in commodities should look for low cost miners with no debt if their portfolios are overall defensive, and should look for low margin miners if their portfolio is more aggressive.